Foreign Tax Deduction

AAA

DEFINITION of 'Foreign Tax Deduction'

One of the itemized deductions that may be taken for taxes paid to a foreign government, which typically are classified as a tax withholding. The foreign tax deduction is usually taken in lieu of the foreign tax credit, if the deduction is more advantageous to the taxpayer.

Foreign taxes are deductible from your U.S. income tax return only if the foreign source has an international tax treaty with the United States.

INVESTOPEDIA EXPLAINS 'Foreign Tax Deduction'

In most cases, the foreign tax credit will provide greater benefits than the deduction. However, the deduction may be more advantageous if the foreign tax rate is high and only a small amount of foreign income relative to domestic income has been received. If the foreign tax deduction is taken, it is reported on Schedule A of the 1040, and the credit can be claimed by filling out Form 1116.

For more information, see IRS Publication 514.

VIDEO

Loading the player...
RELATED TERMS
  1. Expatriate

    An individual living in a country other than their country of ...
  2. IRS Publication 54

    A document published by the Internal Revenue Service that outlines ...
  3. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  4. Foreign Tax Credit

    A non-refundable tax credit for income taxes paid to a foreign ...
  5. Itemized Deduction

    A deduction from a taxpayer's taxable adjusted gross income that ...
  6. Foreign Earned Income Exclusion

    The amount of income earned from a foreign source that is excludable ...
RELATED FAQS
  1. I live in the U.S. How can I trade stocks in China and India?

    Foreign markets have always been an object of envy to domestic investors because the indexes in some foreign countries have ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
Related Articles
  1. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  2. Taxes

    What To Do If You Lost Your W-2

    There's no need to panic if you don't have your Form W-2 to file taxes, there are easy ways to gain access to the missing form or file without it.
  3. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.
  4. Taxes

    The First Thing You Should Do With Your Tax Refund

    Nobody likes to pay taxes, but everyone loves to get a tax refund. When the check arrives in the mail, it's hard to resist spending it on some indulgence.
  5. Taxes

    How Does An IRS Audit Work?

    It doesn't automatically mean an IRS agent will be ringing your doorbell. Here are the different types of IRS audits and how to handle them.
  6. Taxes

    Made A Mistake On Your Tax Return? Don't Panic

    You can always file an amended return. But the sooner you do it, the better.
  7. Taxes

    Business Taxes: Not Paying More Than You Have To

    If you're a small business owner, note these potential tax deductibles so that you don't pay taxes that could have been extra revenue in your account.
  8. Taxes

    How To Arrange An Installment Agreement For Taxes

    Not enough cash on hand for your April 15th tax bill? No need to panic. Here's what to do.
  9. Taxes

    Is It Smart To Get Dual Citizenship?

    Does it ever make sense to be a citizen of the U.S. and somewhere else? Yes, so you can work minus a visa – not so much, if you get drafted into the army.
  10. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center